Canada No. 1 in consumer debt

May 12, 2010 - John Greenwood

Helped by rock-bottom interest rates, consumers have been borrowing at unprecedented levels and now owe a record $1.41 trillion, putting Canada in the No. 1 spot among OECD nations in terms of consumer debt to financial assets, says a study by the Certified General Accountants Association of Canada.

That puts Canada ahead of countries such as the Slovak Republic and, tellingly, Greece.

It equates to $41,740 for every individual man, woman and child, or about 2.5-times the level of debt in 1989.

Much of this borrowing took place over the past two years, including the latter part of 2008 and early part of 2009 when the country was in recession.

A significant chunk of the debt is related to residential mortgages. While Canadians have been borrowing less to pay for homes over the past two years, they have been spending more on just about everything else, so the total debt level continued to grow.

The Accountants Association is only the latest group to raise a red flag over ballooning consumer debt levels in Canada. Last fall, Moody's Investors Service warned that consumer borrowing in this country was at record levels and appeared to be following the same trajectory as the U.S. before the real-estate crash.

One reason for the increased borrowing is that interest rates are close to the lowest they have been in more than a generation, part of the Bank of Canada's response to the financial crisis.

During the turmoil, the federal government bought more than $65 billion of residential mortgages from the banks, providing additional incentive to lend.

The easy access to credit helped fix the financial system's liquidity problem but it had other consequences, such as encouraging consumers to borrow more.

With the Bank of Canada expected to raise rates this year, the fear is that many of those heavily leveraged consumers could find themselves struggling to make their payments. Pressures would also arise if unemployment were to move up or the housing market to deteriorate.

Canadian households have been increasingly financing consumption through borrowing rather than income. By the end of 2009, it had reached the point that 75 cents of every dollar spent to buy cars was borrowed, up from 39 cents in mid-2008, the survey says.

One reason for the discrepancy between Canada and its peers in the Organization for Economic Co-operation and Development is that nearly all were hit much worse by the crisis and, as a result, consumers in those countries have been paying down debt recently.